Forex patterns are repetitive formations or movements that occur on price charts of currency pairs in the foreign exchange (forex) market. Traders use these patterns to identify potential trading opportunities and make informed decisions about buying or selling currencies. Forex patterns can be categorized into two main types: reversal patterns and continuation patterns.
- Head and Shoulders: This pattern consists of three peaks, with the middle peak (the head) being higher than the other two (the shoulders). It indicates a potential trend reversal from bullish to bearish.
- Double Top/Bottom: In a double top pattern, the price reaches a resistance level twice and fails to break above it. Conversely, a double bottom pattern occurs when the price reaches a support level twice and fails to break below it. These patterns suggest a potential trend reversal.
- Triple Top/Bottom: Similar to double tops and bottoms, triple tops and bottoms have three peaks or valleys that indicate a potential reversal in the prevailing trend.
- Flags and Pennants: Flags and pennants are short-term consolidation patterns that occur after a strong price movement. Flags have parallel trend lines, while pennants have converging trend lines. They suggest that the market is taking a breather before continuing the previous trend.
- Symmetrical Triangle: This pattern is formed by converging trend lines that connect a series of higher lows and lower highs. It indicates a period of consolidation before the price breaks out in either direction.
- Ascending/Descending Triangle: Ascending triangles have a flat top trend line and a rising bottom trend line, indicating a potential bullish continuation. Descending triangles have a flat bottom trend line and a descending top trend line, suggesting a potential bearish continuation.
It's important to note that forex patterns are not guaranteed indicators of future price movements. Traders should use them in conjunction with other technical analysis tools and risk management strategies to make informed trading decisions.